The Forward View – Australia: October 2017

Balancing multiple objectives, as business remains strong and consumers cautious.

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 Overview:

  • The forecast outlook is essentially unchanged, following revisions to our expectations for the labour market and the RBA cash rate last month. We are pencilling in two 25bp rate hikes from mid-2018, with employment now expected to be strong enough to give the RBA enough confidence in its forecasts for an eventual lift in wages growth and inflation by that point.
  • That said, we remain more cautious about the economic outlook than the central bank, mindful of the potential hurdles to growth such as impending peaks in dwelling construction and LNG exports,  and a struggling household sector amidst low wages growth, higher energy prices and elevated underemployment and household debt.
  • For now, buoyant business activity is a positive signal for both investment and employment. Stronger conditions have become more synchronised across industries and states and territories. That said, confidence has dipped in the past two months, and large increases in energy costs are a growing risk for a range of industries, particularly for intensive users of natural gas such as mining, manufacturing and electricity & water supply (see chart page 2). While domestic gas prices may respond somewhat to forced redirection of gas for domestic use, the best we can hope for is for domestic prices to align with Australian contracted export prices – which while lower than the global spot price, would represent a three-fold increase in domestic prices from just 2 years ago and risks to supply would likely remain. Q3 and to some extent Q4 inflation figures are also likely to be higher as utility prices for consumer surge.
  • Employment continues to accelerate, with a welcome pick up in full-time jobs. This should help local economies affected by the auto manufacturing closures in coming months, although location/skill mismatches will see some communities struggle.
  • Evidence of consumer caution continues, despite the acceleration in employment. Retail sales dropped a hefty 0.6% in August, as foreshadowed by NAB’s new Cashless Retail Index. Retail conditions in the business survey have also dropped back into negative territory (in trend terms), suggesting a combination of soft consumer demand and margin compression.
  • Sydney’s housing market is finally showing signs of cooling, as evidenced by lower price growth and auction clearance rates. Melbourne’s house prices growth remains rapid however, while there is strong performance in Hobart, Canberra and to a lesser extent, Adelaide. While the RBA has signalled that rate rises remain some way off (and that there are risks to hiking prematurely), policymakers are somewhat uncomfortable with current housing market conditions, with further macro-prudential measures to cool housing credit a possibility

For further details, please see the attached document.